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CMA Final · Corporate Financial Reporting · Valuation of Shares (including Determination of Goodwill)

Ananya Pharma Ltd is valuing a three-year option on exchange-traded shares of another company. The only volatility data available is the historical volatility derived from past share prices, and it is used as the volatility input. How does Ind AS 113 treat this input?

It is a Level 3 input. Ind AS 113 states that historical volatility typically does not represent current market participants' expectations about future volatility, even when it is the only information available. The shares being exchange-traded does not change this classification.

  1. AIt is a Level 3 input, because historical volatility typically does not represent current market participants' expectations about future volatilityCorrect
  2. BIt is a Level 1 input, because the shares are exchange-traded
  3. CIt is a Level 2 input, because the share prices are observable
  4. DIt is outside the scope of Ind AS 113, because options are share-based payments

Explanation

Ind AS 113 gives historical volatility for a three-year option on exchange-traded shares as an example of a Level 3 input. This holds even if it is the only information available to price the option. The exchange listing makes the share price observable, but it does not make historical volatility a Level 1 input. The share-based payment scope exclusion applies only to transactions within Ind AS 102, and nothing in the case suggests the option is one.

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